373

CARPENTER FAMILY INVESTMENTS, LLC, CARPENTER CAPITAL

MANAGEMENT, LLC, TAX MATTERS PARTNER, PETITIONER

v. COMMISSIONER OF INTERNAL REVENUE, 

RESPONDENT

Docket No. 30833–08. Filed April 25, 2011. 

P moved for summary judgment on the ground that R’s 

partnership item adjustments were made after the general 3-

year period of limitations for assessing tax had expired. R 

argues that an extended 6-year period of limitations applies. 

Held: The 3-year period of limitations is applicable. Thus P’s 

motion for summary judgment will be granted. 

Kevin T. Pearson and Eric J. Kodesch, for petitioner. 

Gary J. Merken, for respondent. 

OPINION 

WHERRY, Judge: This case is before the Court on petitioner’s motion for summary judgment filed September 28, 

2009. Respondent filed an objection to petitioner’s motion on 

November 20, 2009. Petitioner filed a memorandum in support of its motion on July 27, 2010. The issue is whether the 

notice of final partnership administrative adjustment (FPAA) 

challenged in the petition was issued before the applicable 

period of limitations for assessing tax had expired. Our decision turns on whether the general 3-year period of limitations under section 6501(a) or the extended 6-year period of 

limitations under section 6229(c)(2) or section 6501(e)(1)(A) 

374 136 UNITED STATES TAX COURT REPORTS (373) 

1Section references are to the Internal Revenue Code of 1986, as amended and in effect for 

the tax year at issue. 

applies. 1 This is an issue of law and may be disposed of by 

summary judgment pursuant to Rule 121, Tax Court Rules 

of Practice and Procedure. See also Sundstrand Corp. v. 

Commissioner, 98 T.C. 518, 520 (1992) (‘‘Summary judgment 

is appropriate if the pleadings and other materials show that 

there is no genuine issue as to any material fact and a decision may be rendered as a matter of law.’’), affd. 17 F.3d 965 

(7th Cir. 1994); Fla. Peach Corp. v. Commissioner, 90 T.C. 

678, 681 (1988) (‘‘Summary judgment is intended to expedite 

litigation and avoid unnecessary and expensive trials.’’). 

Background 

I. Undisputed Facts

The following facts are not in dispute. Petitioner, Carpenter Capital Management, LLC, is a Nevada limited 

liability company classified as a partnership for Federal 

income tax purposes. Petitioner is the tax matters partner of 

Carpenter Family Investments, LLC, an Oregon limited 

liability company classified as a partnership for Federal 

income tax purposes with its principal place of business in 

Salem, Oregon (the partnership). 

At the end of its 2000 taxable year the partnership was 

owned as follows: Tommie Carpenter, 0.5 percent; Virginia 

Carpenter, 0.5 percent; petitioner, 99 percent. During the 

taxable year ending December 31, 2000, petitioner was 

owned as follows: Tommie Carpenter, 75.25 percent and Virginia Carpenter, 24.75 percent. Accordingly, Tommie and 

Virginia Carpenter (the partners) ultimately were allocated 

all items of income, gain, loss, deduction, and credit of the 

partnership. 

During its 2000 taxable year the partnership sold shares 

of stock of American Tower Corp. (ATC), a publicly traded corporation listed on the New York Stock Exchange, for total 

proceeds of $29,608,861 (the stock sale). On or before October 

15, 2001, the partnership timely filed Form 1065, U.S. 

Return of Partnership Income, for its taxable year ending 

December 31, 2000. On this information return the partnership reported gross proceeds of $29,608,861, an adjusted tax 

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 375

basis of $23,285,745, and gain of $6,323,116 from the stock 

sale. On or before October 15, 2001, the partners timely filed 

a joint income tax return on Form 1040, U.S. Individual 

Income Tax Return, for calendar year 2000. On this tax 

return the partners reported all of the $6,323,116 gain from 

the stock sale. 

On April 10, 2007, petitioner sent to respondent a Form 

872–P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items, executed on behalf of the partnership. Also on April 10, 2007, the partners sent to 

respondent an executed Form 872–I, Consent to Extend the 

Time to Assess Tax As Well As Tax Attributable to Items of 

a Partnership. On October 2, 2008, respondent issued an 

FPAA to petitioner, as tax matters partner of the partnership, 

for the partnership’s taxable year ending December 31, 2000. 

II. The Theory of the FPAA

Respondent alleges that ‘‘the partnership exploited a complex series of basis-inflating tax avoidance transactions (a 

variant of the Son-of-BOSS shelter described in Notice 2000–

44) beginning in December 1999.’’ See Notice 2000–44, 2000–

2 C.B. 255, which describes so-called Son-of-BOSS transactions. See also Kligfeld Holdings v. Commissioner, 128 T.C. 

192, 194 (2007), discussing the prototypical Son-of-BOSS

transaction: 

Son-of-BOSS is a variation of a slightly older alleged tax shelter known as 

BOSS, an acronym for ‘‘bond and options sales strategy.’’ There are a 

number of different types of Son-of-BOSS transactions, but what they all 

have in common is the transfer of assets encumbered by significant liabilities to a partnership, with the goal of increasing basis in that partnership. 

The liabilities are usually obligations to buy securities, and typically are 

not completely fixed at the time of transfer. This may let the partnership 

treat the liabilities as uncertain, which may let the partnership ignore 

them in computing basis. If so, the result is that the partners will have 

a basis in the partnership so great as to provide for large—but not outof-pocket—losses on their individual tax returns. * * *

Respondent claims a Son-of-BOSS shelter is at work on 

account of a transfer to the partnership ‘‘of short sale proceeds of Treasury Notes and the obligation to close the open 

short sale position’’. Respondent contends that this transfer 

‘‘artificially stepped-up inside basis’’. According to 

respondent: ‘‘As a result of the artificial step-up in basis in 

376 136 UNITED STATES TAX COURT REPORTS (373) 

the American Tower Corporation stock, the partnership’s 

total net long-term gains derived from dealings in property 

on its 2000 return was [significantly] understated’’. 

III. Motion for Summary Judgment

Petitioner moved for summary judgment, arguing that the 

FPAA was not timely because it was issued after ‘‘The period 

of limitations imposed by I.R.C. § 6501 on assessment and 

collection of tax * * * [of] three years from the date the 

return to which the tax relates was filed.’’ Both the partnership’s information tax return and the partners’ joint income 

tax return were filed on or before October 15, 2001. The 3-

year limitations period, if applicable, would have expired on 

or before October 15, 2004. Petitioner contends that ‘‘Because 

the FPAA was issued after October 15, 2004, respondent is 

precluded from assessing any tax attributable to items 

reported on the Partnership Tax Return.’’

Petitioner further argues that the untimeliness of the FPAA

invalidates petitioner’s and the partners’ consents to extend 

the limitations period. ‘‘Neither of the Forms 872 signed by 

petitioner or the Partners was executed before the expiration 

of the three-year period of limitations imposed by I.R.C. §

6501(a) or 6229(a).’’ As a result, according to petitioner, these 

consents cannot be used ‘‘to reopen the three-year period of 

limitations on assessment and collection of tax.’’ See sec. 

6501(c)(4) (‘‘Where, before the expiration of the time prescribed in this section for the assessment of any tax imposed 

by this title, * * * both the Secretary and the taxpayer have 

consented in writing to its assessment after such time, the 

tax may be assessed at any time prior to the expiration of 

the period agreed upon.’’ (Emphasis supplied.)); see also 

Romine v. Commissioner, 25 T.C. 859, 871 (1956) (holding 

that if a taxpayer executes a consent after the expiration of 

the 3-year limitations period, the Commissioner bears the 

burden of proving that a longer limitations period applies 

and that the consent was obtained within such longer 

period); Seltzer v. Commissioner, 21 T.C. 398 (1953) (same).

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 377

2See infra note 15, discussing the current procedural posture of Intermountain Ins. Serv. of 

Vail, LLC v. Commissioner, 134 T.C. 211 (2010), and related cases, in which the Commissioner 

has hitherto succeeded twice on appeal, and failed an equal number of times, as he seeks to 

invoke sec. 6501(e)(1)(A) and apply a 6-year limitations period to Son-of-BOSS transactions. 

IV. Timeliness of the FPAA

Respondent claims that the applicable period of limitations 

is not 3 years but 6 years, as provided in sections 6229(c)(2) 

and 6501(e)(1)(A). 

On September 24, 2009, the Treasury Department and the Internal Revenue Service issued temporary Treasury regulations under Sections 

6229(c)(2) and 6501(e)(1)(A) that clarify that an overstatement of basis 

relating to the disposition of property, other than the sale of goods or services in a trade or business, constitutes an omission from gross income for 

purposes of Sections 6229(c)(2) and 6501(e)(1)(A). 

Respondent argues that these temporary regulations, sections 301.6229(c)(2)–1T and 301.6501(e)–1T, Temporary 

Proced. & Admin. Regs., 74 Fed. Reg. 49322–49323 (Sept. 28, 

2009), extend the limitations period for the partnership’s 

2000 taxable year to 6 years because they ‘‘apply to taxable 

years with respect to which the applicable period for 

assessing tax, as interpreted in the temporary regulations, 

did not expire before September 24, 2009.’’

Because ‘‘The FPAA * * * issued within the six-year period 

of limitations provided in Sections 6229(c)(2) and 

6501(e)(1)(A), as further extended by consent,’’ respondent 

contends that the FPAA was timely. 

Discussion 

I. Introduction

We have previously held invalid the temporary regulations 

respondent cites. See Intermountain Ins. Serv. of Vail, LLC 

v. Commissioner, 134 T.C. 211, 224 (2010). 2 Since we issued 

our Opinion in Intermountain, the Commissioner has issued 

these regulations in final form. See secs. 301.6229(c)(2)–1, 

301.6501(e)–1, Proced. & Admin. Regs. Also, the Supreme 

Court has issued its opinion in Mayo Found. v. United States, 

562 U.S. ll, 131 S. Ct. 704 (2011), which clarifies that the 

Commissioner’s regulatory efforts are generally entitled to 

the same Chevron standard as those of any other agency. See 

Chevron U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. 

378 136 UNITED STATES TAX COURT REPORTS (373) 

3 By their terms, the final regulations purport to apply to this case. Other than minor stylistic 

changes in the effective/applicability provisions, which we discuss infra Pt. II, and largely conforming changes in the accompanying preambles, which we discuss infra Pt. IV, the final and 

temporary regulations are identical. Therefore, we have decided not to delay these proceedings 

for supplemental briefing on the final regulations before ruling on their (in)validity. We note 

that to date neither party has asked for leave to file such briefs. By comparison, the Commissioner promptly filed notices of supplemental authority calling attention to the Supreme Court’s 

opinion in Mayo Found. v. United States, 562 U.S. ll, 131 S. Ct. 704 (2011), in the various 

Intermountain-related cases on appeal discussed infra note 15, including Grapevine Imps., Ltd. 

v. United States, 636 F.3d 1368 (Fed. Cir. 2011), in which oral argument was conducted the day 

after Mayo was issued. Moreover, the Commissioner has asked these various Courts of Appeals 

to apply the final regulations. Consequently, respondent can reasonably be expected to cite and 

rely on the final regulations as relevant and applicable authority in any appeal of our decision. 

We thus feel we would be derelict in our duty to the court hearing such an appeal if we were 

to simply grant petitioner’s motion for summary judgment based on the temporary regulations 

without discussing the final regulations. 

837 (1984) (establishing a two-step framework for testing the 

validity of an agency’s interpretation of ambiguous statutes). 

We take this opportunity to consider whether anything in the 

final regulations or their preamble or Mayo warrants a revision of our Intermountain holding. 3

II. Effective/Applicability Date Provisions: Placing the Horse 

Firmly in the Cart

The preamble to these final regulations asserts that ‘‘The 

Tax Court’s majority in Intermountain erroneously interpreted the applicability provisions of the temporary and proposed regulations’’. T.D. 9511, 2011–6 I.R.B. 455, 456. We are 

not infallible and have reviewed our interpretation of the 

regulations’ applicability provisions in the light of respondent’s criticism, but as discussed below we still do not agree 

with respondent. 

The temporary regulations provided that ‘‘The rules of this 

section apply to taxable years with respect to which the 

applicable period for assessing tax did not expire before September 24, 2009.’’ Secs. 301.6229(c)(2)–1T(b), 301.6501(e)–

1T(b), Temporary Proced. & Admin. Regs., supra (emphasis 

supplied). In Intermountain Ins. Serv. of Vail, LLC v. 

Commissioner, supra at 218–219, we had commented on the 

‘‘notably convoluted interpretation of the effective/applicability date provisions’’ required to cause the temporary regulations to apply to a case where the 3-year limitations period 

has already expired. We had remarked that the Commissioner’s attempt to apply the temporary regulations in that 

case ‘‘begs the question’’. Id.

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 379

4The final regulations’ preamble goes on to assert that ‘‘Consistent with that position [which 

assumes their substantive validity], the final regulations apply to taxable years with respect to 

which the six-year period for assessing tax under section 6229(c)(2) or 6501(e)(1) was open on 

or after September 24, 2009.’’ T.D. 9511, 2011–6 I.R.B. 455, 456. On the basis of this conclusory 

assertion, the Court of Appeals for the Federal Circuit held in Grapevine Imps., Ltd. v. United 

States, supra at 1383, that ‘‘by their plain terms the new Treasury regulations apply to’’ the 

taxpayer’s tax year for which the 3-year limitations period had expired. We do not believe that 

the actual text of the regulations says as much. As mentioned above, pursuant to their effective/

applicability date provisions, the substance of the final regulations ‘‘[applies] to taxable years 

with respect to which the period for assessing tax was open on or after September 24, 2009’’. 

T.D. 9511, 2011–6 I.R.B. at 455. In ‘‘an interpretation of an administrative regulation a court 

must necessarily look to the administrative construction of the regulation if the meaning of the 

words used is in doubt.’’ Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 413–414 (1945); 

Continued

By comparison with the effective/applicability date provisions of the temporary regulations, the final regulations provide that ‘‘This section applies to taxable years with respect 

to which the period for assessing tax was open on or after

September 24, 2009.’’ Sec. 301.6229(c)(2)–1(b), Proced. & 

Admin. Regs. (emphasis supplied); see also sec. 301.6501(e)–

1(e), Proced. & Admin. Regs. Respondent and the Treasury 

Department contend that ‘‘The final regulations * * * clarify 

the effective/applicability date provisions in the section 

6229(c)(2) and section 6501(e) regulations to eliminate a perceived ambiguity in the temporary regulations, that was 

brought to light by the Tax Court in Intermountain Insurance Service of Vail v. Commissioner, 134 T.C. No. 11 (2010), 

appeal docketed, No. 10–1204 (D.C. Cir.).’’ T.D. 9511, 2011–

6 I.R.B. at 455. 

We fail to see how this semantic distinction in the effective/applicability date provisions between the final regulations and the temporary regulations, the verbal equivalent of 

the other side of the same coin, begets a response to the 

begged question. 

Unlike the terse text of the final regulations’ effective/

applicability date provisions, the accompanying preamble 

contends at length that 

The Internal Revenue Service will continue to adhere to the position that 

‘‘the applicable period’’ of limitations is not the ‘‘general’’ three-year limitations period. * * * The expiration of the three-year period does not ‘‘close’’ 

a taxable year if a longer period applies. * * * [T.D. 9511, 2011–6 I.R.B. 

at 456; emphasis supplied.] 

However, whether or not a longer period should, in fact, 

apply is the very subject matter, the sum and substance of 

the regulations. 4 Clearly, then, as with the temporary reguVerDate 0ct 09 2002 14:45 May 30, 2013 Jkt 372897 PO 20009 Frm 00007 Fmt 2847 Sfmt 2847 V:\FILES\CARP.136 SHEILA
380 136 UNITED STATES TAX COURT REPORTS (373) 

see also Wyo. Outdoor Council v. U.S. Forest Serv., 165 F.3d 43, 53 (D.C. Cir. 1999) (‘‘Although 

the preamble does not ‘control’ the meaning of the regulation, it may serve as a source of evidence concerning contemporaneous agency intent.’’). However, whether a tax year in question 

is ‘‘open’’ is the very essence of these proceedings. Deferring to respondent’s interpretation of 

‘‘open’’ tax years for purposes of the effective/applicability date provisions would inevitably resolve the question of legitimacy of the regulations’ substance. More generally, if we were to allow 

the Secretary to replicate in his regulations the core of the Code provision at issue and then 

defer to the Commissioner’s interpretation of this regulatory text, it would inappropriately 

imbue this text with the solidity of Seminole Rock, instead of subjecting it to the two steps of 

Chevron. Cf. Stinson v. United States, 508 U.S. 36, 45 (1993) (declining to apply Chevron and 

relying on Seminole Rock for the proposition that ‘‘provided an agency’s interpretation of its own 

regulations does not violate the Constitution or a federal statute, it must be given controlling 

weight unless it is plainly erroneous or inconsistent with the regulation’’ (quotation marks omitted)). 5 Respondent insists ‘‘these regulations are not retroactive’’. T.D. 9511, 2011–6 I.R.B. at 456. 

The Commissioner’s previous regulatory foray in his ongoing quest to bring to justice past abusive Son-of-BOSS transactions was lost, as Eurydice was lost to Orpheus, when the Commissioner chose to turn around and look directly backwards by giving his regulations full-blown retroactive effect. See generally Murfam Farms, LLC v. United States, 88 Fed. Cl. 516 (2009) (holding as impermissibly retroactive sec. 1.752–6, Income Tax Regs., which requires reduction in a 

partner’s outside basis in the partnership upon the partnership’s assuming the partner’s contingent liability, and discussing other similar holdings). 

Perhaps mindful of that experience, respondent now argues that he is no longer looking back. 

Instead, he claims that he is, in effect, glancing sideways, and appears to wield the circular logic 

of the effective/applicability date provisions as the round and polished shield of Perseus in which 

he can safely view the Gorgon’s reflection. 

Sec. 7805(b) and its caption of ‘‘Retroactivity of Regulations’’ notwithstanding, in the conventional linear temporal mode, changes in legal rules have only prospective impact. ‘‘At least until 

we devise time machines, a change can have its effects only in the future.’’ Bergerco Can. v. 

U.S. Treasury Dept., 129 F.3d 189, 192 (D.C. Cir. 1997). Putting such abstruse arguments to 

one side, these regulations, if valid, would cause a limitations period that would have otherwise 

expired as of September 23, 2009, to remain open beyond that date. They thus ‘‘relate back’’ 

and in that respect are ‘‘retroactive’’ in the mundane sense of the word. 6 Chenery sweeps wider than the Administrative Procedure Act’s ‘‘basis and purpose’’ requirement, 5 U.S.C. sec. 553(c) (2006). Requiring an agency to give reasons for its rulemaking will 

lations, in order to apply the final regulations to a taxable 

year after the expiration of the ‘‘general’’ 3-year limitations 

period, one must presuppose that the regulations are otherwise valid and that they apply retroactively. 5 In other words, 

the applicability of the regulations assumes their substantive 

validity. We held this assumption untenable in Intermountain Ins. Serv. of Vail, LLC v. Commissioner, supra at 

224. After reviewing the final regulations and their preamble 

and considering any effect that Mayo may have, we reaffirm 

our prior conclusion for the reasons set forth below. 

III. Substantive Validity: Divining Congressional Intent

As we did previously when reviewing the temporary regulations, and as we now do in testing the final regulations, we 

‘‘must judge the propriety of * * * [respondent’s] action 

solely by the grounds invoked by’’ him. SEC v. Chenery 

Corp., 332 U.S. 194, 196 (1947). 6 From the preambles to the 

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 381

not itself ensure that review of the rule will be limited to those reasons. Legislation or trial 

court decisions can both be subsequently sustained on other grounds. See, e.g., U.S. R.R. Ret. 

Bd. v. Fritz, 449 U.S. 166, 179 (1980) (‘‘Where, as here, there are plausible reasons for Congress’ 

action, our inquiry is at an end. It is, of course, constitutionally irrelevant whether this reasoning in fact underlay the legislative decision’’ (internal quotation marks omitted)); Helvering 

v. Gowran, 302 U.S. 238, 245 (1937) (‘‘In the review of judicial proceedings the rule is settled 

that if the decision below is correct, it must be affirmed, although the lower court relied upon 

a wrong ground or gave a wrong reason.’’). However, agency action can be upheld only on the 

ground previously advanced by the agency. See, e.g., Burlington Truck Lines, Inc. v. United 

States, 371 U.S. 156, 169 (1962) (holding that under Chenery ‘‘For the courts to substitute their 

or counsel’s discretion for that of the * * * [agency] is incompatible with the orderly functioning 

of the process of judicial review.’’). 

7This provision, without changes in text, has since been redesignated sec. 6501(e)(1)(B)(i) by 

the Hiring Incentives to Restore Employment Act of 2010, Pub. L. 111–147, sec. 513(a)(1), 124 

Stat. 111. The provision states that ‘‘In the case of a trade or business, the term ‘gross income’ 

means the total of the amounts received or accrued from the sale of goods or services (if such 

amounts are required to be shown on the return) prior to diminution by the cost of such sales 

or services’’. Since bases of goods or services sold by a trade or business do not affect its gross 

income, an overstatement of any such basis will not constitute omission from gross income. 

8See infra note 10. 

temporary and final regulations, we isolate two discrete 

grounds that respondent can possibly adduce as bases upon 

which his regulatory project ‘‘purports to rest’’, id.: (1) The 

Supreme Court’s holding in Colony, Inc. v. Commissioner, 

357 U.S. 28 (1958), which excluded overstatement of basis 

from the phrase ‘‘omits from gross income’’ in the identically 

worded predecessor of current section 6501(e)(1)(A), was confined by section 6501(e)(1)(A)(i) to a trade or business context; 7 and (2) Colony represents the Supreme Court’s own 

construction of this phrase as it now appears in section 

6501(e)(1)(A), rather than an explication of unambiguous 

congressional intent. 

These two grounds are mutually exclusive. If the Colony

holding has been statutorily confined to a trade or business 

context, it cannot any longer constitute the Supreme Court’s 

interpretation of current section 6501(e)(1)(A). Conversely, if 

Colony represents the Supreme Court’s own construction of 

this text, the holding must necessarily extend beyond just 

trade or business. 

Respondent leads with the former contention, which he 

vociferously espouses, not just in the preambles to the temporary and final regulations, but also in his submissions on 

brief in this and other similar cases. 8 The latter claim, on 

the other hand, is presented with great circumspection. After 

being absent in the preamble to the temporary regulations, 

this claim appears stealthily in the final regulations’ preVerDate 0ct 09 2002 14:45 May 30, 2013 Jkt 372897 PO 20009 Frm 00009 Fmt 2847 Sfmt 2847 V:\FILES\CARP.136 SHEILA
382 136 UNITED STATES TAX COURT REPORTS (373) 

9See infra Pt. IV. 

10See, e.g., Burks v. United States, 633 F.3d 347, 350 (5th Cir. 2011) (‘‘The government contends that Colony applies only in the context of a trade or business engaged in the sale of goods 

or services.’’); Home Concrete & Supply, LLC v. United States, 634 F.3d 249, 254 (4th Cir. 2011) 

(‘‘In this case, the district court distinguished Colony on the ground that its holding is limited 

to cases in which the taxpayer is a trade or business selling goods or services.’’); Salman Ranch 

Ltd. v. United States, 573 F.3d 1362, 1371 (Fed. Cir. 2009) (‘‘In the government’s view, * * * 

Colony’s holding [is properly construed] narrowly by defining ‘gross income’ as gross receipts of 

a trade or business from sales of goods or services’’); Bakersfield Energy Partners, LP v. Commissioner, 568 F.3d 767, 775 (9th Cir. 2009) (‘‘the IRS argues that Colony, read correctly, interpreted § 275(c) as having the same meaning as § 6501(e)(1)(A)(i) and applying only to taxpayers 

in a trade or business’’), affg. 128 T.C. 207 (2007); accord Beard v. Commissioner, 633 F.3d 616, 

620 (7th Cir. 2011) (accepting the Commissioner’s argument and finding that ‘‘the situation 

faced by the Court in Colony [is one] where there is an omission of an actual receipt or accrual 

in a trade or business situation’’), revg. T.C. Memo. 2009–184. 

amble, and even there is shrouded in caveats and qualifications. 9

A. Trade or Business With Colony

The final regulations’ preamble reiterates respondent’s 

position, ‘‘set forth in the preamble to the temporary regulations’’, that ‘‘the Supreme Court’s opinion in Colony v. 

Commissioner, 357 U.S. 28 (1958), * * * [is limited to] an 

omission from gross income in the context of a trade or business under the predecessor of section 6501(e).’’ T.D. 9511, 

2011–6 I.R.B. at 455; see also T.D. 9466, 2009–43 I.R.B. 551, 

552 (‘‘Therefore, by amending the Internal Revenue Code, 

including the addition of a special definition of ‘gross income’ 

with respect to a trade or business, Congress effectively limited what ultimately became the holding in Colony, to cases 

subject to section 275(c) of the 1939 Internal Revenue 

Code.’’). This echoes similar arguments that the Commissioner has made on brief in related litigation across the 

country. 10

This case would, absent stipulation to the contrary, be 

appealable to the U.S. Court of Appeals for the Ninth Circuit. That court has rejected the argument that the Colony

holding is properly construed as limited to the sale of goods 

and services in a trade or business. ‘‘There is no ground for 

suggesting that the Court intended the same language in §

275(c) to apply differently to taxpayers in a trade or business 

than to other taxpayers.’’ Bakersfield Energy Partners, LP v. 

Commissioner, 568 F.3d 767, 778 (9th Cir. 2009), affg. 128 

T.C. 207 (2007). 

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 383

11The Court of Appeals for the Federal Circuit has since decided to accord the regulations 

at issue here Chevron deference. See Grapevine Imps., Ltd. v. United States, 636 F.3d at 1376. 

The court distinguished this decision from its holding in Salman Ranch that Colony was not 

limited to a trade or business context, declaring that 

Salman Ranch [does not] mandate any different conclusion. This court there closely analyzed 

both the updated statute and its legislative history to determine whether divergence from Colony was warranted. It made no separate holding that the statute was unambiguous for purposes 

of Chevron step one * * *. [Id. at 1378; citation omitted.]

Grapevine does not reject the court’s prior reading of Colony in Salman Ranch. Since ‘‘Salman 

Ranch preceded the issuance of Treasury regulations interpreting this statute’’, Grapevine characterized the court’s task in Salman Ranch ‘‘different from ours.’’ Id. at 1377. Finding Colony

‘‘no bar’’ to granting the regulations Chevron deference, Grapevine concludes that ‘‘Salman 

Ranch notwithstanding, we will defer to the Treasury Department’s interpretation in applying 

§ 6501(e)(1)(A).’’ Id. at 1381. As we explain infra note 28, we have concluded to the contrary 

that Colony is a ‘‘bar’’ to Chevron deference. 

In Bakersfield, the Court of Appeals for the Ninth Circuit 

held that the current section 6501(e)(1)(A), which was 

enacted as part of the Internal Revenue Code of 1954, did not 

constitute a ‘‘new statutory setting’’ for the phrase ‘‘omits 

from gross income’’. 

Congress did not change the language in the body of § 6501(e)(1)(A), which 

is identical to the language in § 275(c) that the Supreme Court construed 

in Colony. As a general rule, we construe words in a new statute that are 

identical to words in a prior statute as having the same meaning. * * * 

[Id. at 775.] 

Finding ‘‘that applying Colony to the 1954 Code would [not] 

render * * * superfluous’’ any provision of section 

6501(e)(1)(A), id. at 776, the court went on to conclude that 

the Colony

holding controls our interpretation of the same language in § 275(c)’s successor provision, § 6501(e)(1)(A) of the 1954 Code. However sensible the 

IRS’s argument may be that a taxpayer can ‘‘omit . . . an amount’’ of gain 

by overstating its basis, this argument is foreclosed by Colony. * * * [Id.

at 778.] 

The Court of Appeals for the Ninth Circuit’s opinion in 

Bakersfield was quickly followed by an opinion of the Court 

of Appeals for the Federal Circuit that also failed to ‘‘discern 

any basis for limiting Colony’s holding concerning the ‘omits 

from gross income’ language of I.R.C. § 275(c) to sales of 

goods or services by a trade or business.’’ Salman Ranch Ltd. 

v. United States, 573 F.3d 1362, 1372 (Fed. Cir. 2009). 11

These two Courts of Appeals have now been joined by the 

Courts of Appeals for the Fourth and Fifth Circuits, which 

have similarly declined to limit the Colony holding to a trade 

384 136 UNITED STATES TAX COURT REPORTS (373) 

or business. See Home Concrete & Supply, LLC v. United 

States, 634 F.3d 249, 255 (4th Cir. 2011)) (‘‘Like the Ninth 

and Federal Circuits, we hold that the Supreme Court in 

Colony straightforwardly construed the phrase ‘omits from 

gross income,’ unhinged from any dependency on the taxpayer’s identity as a trade or business selling goods or services.’’); Burks v. United States, 633 F.3d 347, 355 (5th Cir. 

2011) (‘‘We join the Fourth, Ninth, and Federal Circuits by 

finding that Colony’s holding with respect to the definition of 

‘omits from gross income’ [is not limited to trade or business 

and] remains applicable in light of the revisions to the 

Code.’’). 

The Court of Appeals for the Seventh Circuit, on the other 

hand, has sided with the Commissioner and limited the 

applicability of Colony to an omission from income of a trade 

or business. See Beard v. Commissioner, 633 F.3d 616, 620 

(7th Cir. 2011) (concluding that ‘‘Colony’s holding is inherently qualified by the facts of the case * * *, where the 

* * * omission was * * * in the course of trade or business.’’), revg. T.C. Memo. 2009–184. 

Following the Commissioner’s judicial setbacks in Bakersfield and Salman Ranch, the Secretary issued the temporary 

regulations, seeking, as it were, to lay a regulatory foundation for respondent’s position that an overstatement of basis 

does constitute an omission from gross income under section 

6501(e)(1)(A). Respondent claims that this regulatory project 

‘‘is entitled to deference even if the agency’s interpretation 

may run contrary to the opinions in Bakersfield and Salman 

Ranch.’’ See T.D. 9466, 2009–43 I.R.B. at 552. However, neither of those opinions was based on the court’s interpretation 

of section 6501(e)(1)(A). Instead, each court had held Colony

to control this interpretation, which it, in turn, merely followed. In effect, then, respondent is asking us to defer to his 

determination of whether that Supreme Court decision is on 

point. 

Amidst conflicting signals of legislative intent, Chevron

and its progeny certainly require deference to the administering agency’s interpretation of the resulting statutory language. However, we know of no authority, and respondent 

cites none, that requires us to defer to the Commissioner’s 

determination of the applicability of Supreme Court precedent. 

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 385

12 Cf. infra Discussion, Pt. IV, discussing respondent’s ‘‘vague and indecisive’’ attempt to supplant the Colony holding with a contrary interpretation of the statutory text in current sec. 

6501(e)(1)(A). 

13See Beard v. Commissioner, 633 F.3d at 623. Beard lists a number of cases that ‘‘have found 

that Colony does not apply and an overstatement of basis can be an omission from gross income.’’ Id. at 619–620. Included in this list is Phinney v. Chambers, 392 F.2d 680 (5th Cir. 1968), 

a case that was decided decades before the Son-of-BOSS transaction could have constituted the 

proverbial gleam in its promoters’ eyes. As we pointed out in UTAM, Ltd. v. Commissioner, T.C. 

Memo. 2009–253, we believe that ‘‘Phinney is not directly on point and does not persuade this 

Court to overrule Bakersfield.’’ Phinney did not involve applying an extended period of limitations to a transaction in which the taxpayer had overstated basis. Instead, in Phinney, 

The Fifth Circuit Court of Appeals * * * found that the 6-year period of limitations applied to 

a fiduciary income tax return on which the nature of an item of income was misstated. The 

Commissioner was at a disadvantage identifying the error in the reporting of the transaction 

in issue in Phinney because the fiduciary tax return listed the item of income without disclosing 

its receipt in an installment sale. * * * [UTAM, Ltd. v. Commissioner, supra.]

The Court of Appeals for the Fifth Circuit in Burks appears to validate our reading of Phinney

and faults Beard’s interpretation of the case. See Burks v. United States, 633 F.3d at 352 n.5 

(‘‘The Seventh Circuit in Beard incorrectly read our decision in Phinney as limiting Colony’s 

holding.’’). The taxpayers in Beard have since filed a motion for a rehearing en banc based on, 

amongst other grounds, the claim that Beard ‘‘relied heavily on the Commissioner’s interpretation of Phinney, purportedly ‘distinguishing Colony as the Phinney court did.’ This reliance was 

misplaced. The Fifth Circuit [in Burks] stated that ‘they do not read Phinney as limiting Colony’s holding.’ ’’ See also infra note 16, discussing why the Court of Appeals for the Ninth Circuit’s decision in Bakersfield Energy Partners, LP v. Commissioner, 568 F.3d 767 (9th Cir. 2009), 

affords us the luxury of staying on the firm and dry ground of concluding that Colony controls 

the interpretation of sec. 6501(e)(1)(A). 

14The Court of Appeals for the Tenth Circuit in Hernandez-Carrera v. Carlson, 547 F.3d 1237 

(10th Cir. 2008), applied Natl. Cable & Telecomms. Association v. Brand X Internet Servs., 545 

U.S. 967 (2005), to uphold regulations reversing a Supreme Court decision. 

15The Commissioner has appealed to the appropriate Courts of Appeals Intermountain Ins. 

Continued

When Congress speaks in muffled tones, the Commissioner 

presumably enjoys an advantage in deciphering the message. 

And though we are respectful of the Commissioner’s experience in reviewing court opinions, we decline to surrender our 

prerogative of interpreting judicial pronouncements—ambiguous or otherwise. 

Respondent does not purport, at least not explicitly and 

unequivocally, 12 to elevate his interpretation of the text in 

current section 6501(e)(1)(A) above that of the Court in 

Colony. Rather, he seeks to persuade us, as he has succeeded 

in persuading the Court of Appeals for the Seventh Circuit 

in Beard, 13 that the Colony holding is not relevant to our 

inquiry. Respondent may arguably have the authority to 

attempt to reach the former outcome, at least in the Tenth 

Circuit. 14 But we, the U.S. Court of Federal Claims, and the 

U.S. District Courts, subject to review by the respective 

Courts of Appeals and the Supreme Court, retain ultimate 

authority over the latter, in all circuits. 15

386 136 UNITED STATES TAX COURT REPORTS (373) 

Serv. of Vail, LLC v. Commissioner, 134 T.C. 211 (2010), and several companion cases in which 

he had sought to invoke sec. 6501(e)(1)(A) and apply a 6-year limitations period to Son-of-BOSS 

transactions. The Commissioner thus far has been successful in Grapevine Imps., Ltd. v. United 

States, 636 F.3d 1368 (Fed. Cir. 2011), and Beard v. Commissioner, 633 F.3d 616 (7th Cir. 2011), 

discussed supra notes 11 and 13, respectively, and unsuccessful in Home Concrete & Supply, 

LLC v. United States, 634 F.3d 249 (4th Cir. 2011), and Burks v. United States, 633 F.3d 347 

(5th Cir. 2011), discussed infra note 27. The Commissioner’s petition for rehearing en banc was 

denied in Home Concrete and is pending in Burks. The Commissioner is urging the respective 

Courts of Appeals in Burks and other cases still on appeal to apply the final regulations in 

reaching their decisions. See, e.g., Intermountain Ins. Serv. of Vail, LLC v. Commissioner, supra, 

on appeal (D.C. Cir., July 27, 2010); UTAM, Ltd. v. Commissioner, T.C. Memo. 2009–253, on 

appeal (D.C. Cir., Aug. 17, 2010); Reynolds Props., L.P. v. Commissioner, docket No. 22437–07 

(order and decision entered May 11, 2010), on appeal (9th Cir., Aug. 3, 2010); Salman Ranch, 

Ltd. v. Commissioner, docket No. 13677–08 (order and decision entered Aug. 7, 2009), on appeal 

(10th Cir., Oct. 27, 2009). 

16 As pointed out supra note 13 and the accompanying text, the Court of Appeals for the Seventh Circuit has recently rejected the conclusion reached in Bakersfield and Salman Ranch Ltd. 

v. United States, 573 F.3d 1362 (Fed. Cir. 2009), that Colony controls the interpretation of sec. 

6501(e)(1)(A). Beard v. Commissioner, supra. Beard described the Bakersfield reasoning as wading ‘‘through a convoluted discussion of numerators and denominators’’. Id. at 623. Beard also 

dismissed the Federal Circuit’s Salman Ranch holding, characterizing it as ‘‘a deep-dive into legislative history’’. Id. Preferring to toe ‘‘the clear, dry line from the language to the plain meaning 

of Section 6501(e)(1)(A)’’, the Court of Appeals for the Seventh Circuit finds ‘‘that Colony is not 

controlling’’. Id. Since this case would, absent stipulation to the contrary, be appealable to the 

Court of Appeals for the Ninth Circuit, we are content to follow Bakersfield, which holds that 

Colony controls the interpretation of sec. 6501(e)(1)(A). Cf. Golsen v. Commissioner, 54 T.C. 742, 

757 (1970) (requiring us to follow Beard and hold that Colony does not control the interpretation 

of sec. 6501(e)(1)(A) in a case appealable to the Court of Appeals for the Seventh Circuit), affd. 

445 F.2d 985 (10th Cir. 1971). 

17See Grapevine Imps., Ltd. v. United States, supra at 1376 (discussed supra note 11, holding 

that in the absence of the regulations, Colony controls the interpretation of sec. 6501(e)(1)(A), 

but since ‘‘Chevron review of the new Treasury regulations * * * [compels that] the Treasury 

regulations are entitled to Chevron deference * * * [, they constitute] new intervening authority 

* * * [that] require us to depart from * * * [Colony]’’); cf. Beard v. Commissioner, supra at 623 

(highlighting the volume of ink that ‘‘has been spilled in the briefs over whether temporary 

Treasury Regulation Section 301.6501(e)–1T(a)(1)(iii) would be entitled to Chevron deference if 

Colony were found to be controlling’’, the court declined to reach that issue ‘‘Because we find 

that Colony is not controlling’’). 

18We note, without judging, the Commissioner’s asserted ability to command Chevron deference to, and establish Brand X primacy for, regulations that rearrange the tax outcome of a 

transaction well after that transaction’s economic consequences have been realized. See Natl. 

Cable & Telecomms. Association v. Brand X Internet Servs., supra at 982 (‘‘Chevron’s premise 

is that it is for agencies, not courts, to fill statutory gaps.’’). This ace-in-the-hole can trump the 

best laid plans of honest and cynical taxpayers and deter both from asserting their ‘‘Code-given’’ 

rights. For an example of how after-the-fact changes in tax law can render Pyrrhic hard-fought, 

time-consuming, and expensive litigation victories, see Hellerstein, ‘‘Is ‘Internal Consistency’ 

Foolish?: Reflections on an Emerging Commerce Clause Restraint on State Taxation’’, 87 Mich. 

L. Rev. 138, 144–145 n.33 (1988) (discussing the eventual futility of an initially successful Commerce Clause challenge in Tyler Pipe Indus., Inc. v. Wash. Dept. of Revenue, 483 U.S. 232 (1987), 

Following Bakersfield, we conclude that Colony is not limited to a trade or business, and that it controls our 

interpretation of section 6501(e)(1)(A). 16

Such a conclusion, by itself, does not rule out Chevron deference to the regulations. 17 It does mean, however, that 

instead of applying the original version of the Chevron analysis, we apply its Brand X variant. 18 Compare Chevron 

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 387

to the State of Washington’s discriminatory business and occupations tax). For further discussion of a ‘‘meaningful post-deprivation remedy’’ in this context, see Fulton Corp. v. Faulkner, 

516 U.S. 325 (1996); Reich v. Collins, 513 U.S. 106 (1994); Harper v. Va. Dept. of Taxation, 509 

U.S. 86 (1993); McKesson Corp. v. Div. of Alcoholic Beverages & Tobacco, 496 U.S. 18 (1990). 

U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. at 843 

(upholding an agency’s reasonable interpretation of a statute 

only if ‘‘Congress has not directly addressed the precise question at issue’’), with Natl. Cable & Telecomms. Association v. 

Brand X Internet Servs., supra at 984 (allowing ‘‘a court’s 

prior interpretation of a statute to override an agency’s [contrary] interpretation only if the relevant court decision held 

the statute unambiguous’’). 

B. Colony’s Chevron Classification

In Intermountain Ins. Serv. of Vail, LLC v. Commissioner, 

134 T.C. at 224 (internal quotation marks omitted), we held 

that Colony ‘‘forecloses the agency’s interpretation of sections 

6229(c)(2) and 6501(e)(1)(A) and displaces respondent’s temporary regulations.’’ Nothing in the final regulations or their 

preamble, or Mayo, gives us cause to revise that conclusion. 

1. Invitation to Regulation

The Court of Appeals for the Ninth Circuit in Bakersfield

Energy Partners, LP v. Commissioner, 568 F.3d at 778, conceded that in its Colony opinion, the Supreme Court had 

‘‘acknowledged that the statutory language was ambiguous, 

but nonetheless rejected the same interpretation the IRS is 

proposing in this case.’’ (Citations omitted.) Respondent 

claims that this concession by the Court of Appeals constitutes an invitation to issue regulations to reverse the 

Bakersfield outcome. See T.D. 9466, 2009–43 I.R.B. at 552. 

The Court of Appeals had indeed stated that ‘‘The IRS may 

have the authority to promulgate a reasonable reinterpretation of an ambiguous provision of the tax code, even if its 

interpretation runs contrary to the Supreme Court’s ‘opinion 

as to the best reading’ of the provision.’’ Bakersfield Energy 

Partners, LP v. Commissioner, supra at 778 (quoting Natl. 

Cable & Telecomms. Association v. Brand X Internet Servs., 

supra at 983). 

However, ‘‘The Court of Appeals did not indicate definitively whether any such * * * regulations would actually 

trump the Supreme Court’s prior judicial construction.’’ InterVerDate 0ct 09 2002 14:45 May 30, 2013 Jkt 372897 PO 20009 Frm 00015 Fmt 2847 Sfmt 2847 V:\FILES\CARP.136 SHEILA
388 136 UNITED STATES TAX COURT REPORTS (373) 

19On the inadvisability of a blanket prohibition against consulting legislative history, see Harrison v. N. Trust Co., 317 U.S. 476, 479 (1943) (‘‘But words are inexact tools at best and for 

that reason there is wisely no rule of law forbidding resort to explanatory legislative history no 

matter how clear the words may appear on superficial examination.’’ (Internal quotation marks 

omitted.)). If words are inherently ambiguous, then judicial interpretation of an agency-administered statute that eschews legislative history and grants the agency’s interpretation Chevron

deference would apparently cede to the agency power reserved for the legislative branch. Chevron deference would thus seem to violate the same structural constraint that textualists fault 

the use of legislative history for transgressing; i.e., implicit constitutional prohibitions against 

legislative self-delegation, such as the bicameralism and presentment requirements. For an exposition of the nondelegation argument in favor of textualism, see Bank One Chi., N.A. v. Midwest Bank & Trust Co., 516 U.S. 264, 280 (1996) (Scalia, J., concurring in part and in the judgment) (‘‘It has always been assumed that * * * [congressional legislative] powers are nondelegable * * * No one would think that the House of Representatives could operate in such fashion 

that only the broad outlines of bills would be adopted by vote of the full House, leaving minor 

details to be written, adopted, and voted upon only by the cognizant committees.’’). By comparison, Chevron deference would enable ‘‘minor details’’ to be written and adopted by the agency, 

without allowing for any congressional vote, not even that of ‘‘a small band of its number’’. Id.

A defense of legislative history against a nondelegation charge may be found in Breyer, ‘‘On the 

Uses of Legislative History in Interpreting Statutes’’, 65 S. Cal. L. Rev. 845, 863 (1992) (‘‘No 

one claims that legislative history is a statute, or even that, in any strong sense, it is ‘law.’ 

Rather, legislative history is helpful in trying to understand the meaning of the words that do 

make up the statute or the ‘law.’ ’’). 

mountain Ins. Serv. of Vail, LLC v. Commissioner, supra at 

224 n.24. Assuming regulations that are not ‘‘arbitrary, 

capricious, an abuse of discretion, or otherwise not in accordance with law’’, and are issued in ‘‘observance of procedure 

required by law’’, 5 U.S.C. sec. 706(2)(A), (D) (2006), assumptions not necessarily satisfied here, there remain two unresolved issues that would potentially affect the analysis: (1) 

Whether legislative history should be considered at step one 

of the two-step Chevron analysis; and (2) whether a construction of statutory language by the Supreme Court automatically renders the statute unambiguous. 

With respect to the applicability of legislative history at 

Chevron step one, compare Natural Res. Def. Council v. U.S. 

EPA, 526 F.3d 591, 603 (9th Cir. 2008) (‘‘An examination of 

the statutory language and its legislative history assists us 

in this [Chevron step one] inquiry.’’), with Schneider v. 

Chertoff, 450 F.3d 944, 955 n.15 (9th Cir. 2006) (‘‘Although 

we cannot consider legislative history under the first prong 

of Chevron, * * * we note that the Secretary’s regulation 

subverts the very intent of the Nursing Relief Act.’’). 19

Regarding whether an agency’s interpretation can trump a 

prior Supreme Court construction of the same statutory language, compare Natl. Cable & Telecomms. Association v. 

Brand X Internet Servs., 545 U.S. at 1003 (Stevens, J., 

concurring) (‘‘I add this caveat concerning * * * [that part of 

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 389

the Court’s opinion], which correctly explains why a court of 

appeals’ interpretation of an ambiguous provision in a regulatory statute does not foreclose a contrary reading by the 

agency. That explanation would not necessarily be applicable 

to a decision by this Court that would presumably remove 

any pre-existing ambiguity.’’), with Hernandez-Carrera v. 

Carlson, 547 F.3d 1237, 1248 (10th Cir. 2008) (‘‘we conclude 

that the holding of Brand X applies whether the judicial 

precedent at issue is that of a lower court or the Supreme 

Court.’’). 

2. The Mayo Effect

We pause here to observe that the Supreme Court recently 

rejected a taxpayer challenge to section 31.3121(b)(10)–2, 

Employment Tax Regs., promulgated by the Treasury 

Department to define the word ‘‘student’’ in section 

3121(b)(10). Mayo Found. v. United States, 562 U.S. ll, 

131 S. Ct. 704 (2011). In doing so, the Supreme Court clarified that the Chevron standard of deference applies to 

Treasury regulations. The Court pointed out that the taxpayer in Mayo had ‘‘not advanced any justification for 

applying a less deferential standard of review to Treasury 

Department regulations than we apply to the rules of any 

other agency.’’ Id. at ll, 131 S. Ct. at 713. The Court held 

that ‘‘In the absence of such justification, we are not inclined 

to carve out an approach to administrative review good for 

tax law only.’’ Id.

The Supreme Court’s opinion in Mayo implies, by omission 

rather than affirmative statement, that a trial court’s investigation of congressional intent at Chevron step one be limited to the plain text of the statute. See id. at ll, 131 S. 

Ct. at 711 (‘‘In any event, the statutory text still would offer 

no insight into how Congress intended predominance to be 

determined or whether Congress thought that medical residents would satisfy the requirement. * * * In the typical 

case, such an ambiguity would lead us inexorably to Chevron

step two’’ (emphasis supplied)). 

Though Mayo tangentially addresses the first issue and 

appears to frown upon the use of legislative history at step 

one of a Chevron analysis, it is silent on the second issue of 

whether the Supreme Court’s Brand X holding applies to its 

390 136 UNITED STATES TAX COURT REPORTS (373) 

20 As we explain infra Pt. IV, we do not have to engage in an analysis of predicting whether 

the impact of the Brand X holding stops at the doors of the Supreme Court since respondent’s 

‘‘vague and indecisive’’ appeal to Brand X fails to meet the ‘‘clear and understandable basis’’ 

test of SEC v. Chenery Corp., 332 U.S. 194, 196 (1947). 

21Making this determination with respect to court opinions that were handed down well before the Supreme Court had announced and developed the Chevron framework poses a unique 

challenge. Specifically, ‘‘it is sometimes difficult to determine whether pre-Chevron decisions are 

based upon ‘Chevron step one’ (the plain command of the statute) or upon ‘Chevron step two’ 

(a permissible construction of the statute).’’ Home Concrete & Supply, LLC v. United States, 634 

F.3d at 258 (Wilkinson, J., concurring). In Intermountain Ins. Serv. of Vail, LLC v. Commissioner, 134 T.C. at 224 n.22, we noted ‘‘that Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), 

predated both Chevron U.S.A. Inc. v. Natural Res. Def. Council, supra, and Natl. Cable & 

Telecomms. Association v. Brand X Internet Servs., supra, so that the Supreme Court could not 

own precedent. Mayo’s silence on this score is not surprising 

since the Supreme Court had no occasion to interpret the 

word ‘‘student’’ in section 3121(b)(10) before the Treasury 

Department’s issuing of the challenged regulation. 

By comparison, the Supreme Court’s Colony holding predates the regulations at issue here by over half a century. 

Fortunately, and as we explain infra Part IV, respondent’s 

indecision has spared us the ordeal of walking the plank and 

plumbing the depths of Brand X. 20

3. Filling the Gap

Gaps in congressional enunciation, whether intentional or 

inadvertent, can be filled by the Commissioner to dictate the 

underlying meaning. So long as the Commissioner is reasonable, Chevron implies, and Mayo confirms, that we permit 

him to complete Congress’ sentences, unless he contradicts 

the ‘‘unambiguously expressed intent of Congress.’’ Chevron 

U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. at 843. 

Where a court whose precedent is binding on us has previously interpreted the statutory language at issue, ‘‘if the 

prior court decision holds that its construction follows from 

the unambiguous terms of the statute’’, Natl. Cable & 

Telecomms. Association v. Brand X Internet Servs., supra at 

982, then ‘‘that is the end of the matter’’, Chevron U.S.A. Inc. 

v. Natural Res. Def. Council, supra at 842. We, in turn, 

merely follow the precedent, which automatically ‘‘displaces 

a conflicting agency construction.’’ Natl. Cable & Telecomms. 

Association v. Brand X Internet Servs., supra at 983. For any 

court opinion of pre-Chevron vintage, we must confront and 

overcome the Chevron classification challenge on our own, 

without deference to annotations or commentary that the 

Commissioner may provide. 21

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 391

have been aware of the standards against which its opinion would be tested.’’ Judge Wilkinson’s 

concurrence in Home Concrete & Supply, LLC v. United States, supra at 258, phrased it much 

more elegantly in pointing out that ‘‘Justice Harlan in Colony, Inc. v. Commissioner, 357 U.S. 

28 (1958), had no occasion to ponder the permutations of the Chevron test, which came down 

in 1984.’’ In this connection, we are struck by the prophetic nature of Justice Scalia’s warning 

regarding the ‘‘chaotic undermining of all prior judicial decisions that do not explicitly renounce 

ambiguity’’, which he delivered when he asked rhetorically: ‘‘And what of the many cases decided in the past, before this * * * requirement was established?’’ Natl. Cable & Telecomms. 

Association v. Brand X Internet Servs., 545 U.S. at 1018 & n.13 (Scalia, J., dissenting). 

22 Chevron, the ultimate source of the eponymous doctrine, does not confine to the statutory 

text a search for ‘‘the unambiguously expressed intent of Congress.’’ Chevron U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. 837, 843 (1984). In fact, in Chevron, the Supreme Court appeared to place on an equal footing both statutory text and legislative history as ‘‘traditional 

tools of statutory construction’’. Id. at 843 n.9; see, e.g., id. at 845 (quoting with approval United 

States v. Shimer, 367 U.S. 374, 382–383 (1961) (if an agency ‘‘choice represents a reasonable 

accommodation of conflicting policies that were committed to the agency’s care by the statute, 

we should not disturb it unless it appears from the statute or its legislative history that the 

accommodation is not one that Congress would have sanctioned’’ (emphasis supplied))). In discussing the regulations at issue in Chevron, the opinion gives as much importance, and devotes 

almost an equal amount of space, to legislative history as statutory language. The section titled 

‘‘Legislative History’’ spans 21⁄2 pages compared with the 3 pages of the section titled ‘‘Statutory 

Language’’. It would seem, then, that any apparent reluctance to resort to legislative history 

Continued

After maintaining silence on Colony’s proper Chevron

classification in the preamble to the temporary regulations, 

respondent apparently attempts to categorize Colony as a 

Chevron step two decision in the final regulations’ preamble. 

Respondent contends that ‘‘The Supreme Court stated in 

Colony that the statutory phrase ‘omits from gross income’ is 

ambiguous, meaning that it is susceptible to more than one 

reasonable interpretation.’’ T.D. 9511, 2011–6 I.R.B. at 455. 

In Intermountain, we rejected this contention and firmly 

placed Colony in the Chevron step one category. 

Since then, the Supreme Court has issued its Mayo

opinion, which focuses exclusively on the statutory text at 

Chevron step one and suggests (by negative implication) a 

disfavor of using legislative history at that stage. We are not 

persuaded, however, that after Mayo, any judicial construction that examines legislative history is automatically relegated to a Chevron step two holding by that fact alone. 

Mayo’s directive to move ‘‘inexorably’’ from an ambiguity to 

Chevron step two is reserved for the ‘‘typical case’’. More 

importantly, the ambiguity Mayo talks about is not any textual ambiguity per se, but an ambiguity in congressional 

intent that remains after searching the ‘‘statutory text * * * 

[for] insight into how Congress intended’’ the language at 

issue to apply. Mayo Found. v. United States, 562 U.S. at 

ll, 131 S. Ct. at 711. 22

392 136 UNITED STATES TAX COURT REPORTS (373) 

represents current jurisprudential thinking on the use of legislative history in statutory construction generally. It should not be seen as an inherent limitation built into the Chevron twostep framework. See infra note 26 and accompanying text, discussing the anachronism of applying present-day sentiments on acceptable tools of statutory construction to prior Supreme Court 

decisions. 

23 Brand X leaves unspecified the term ‘‘unambiguous terms of the statute’’. At least as far 

as tax law is concerned, determining the true meaning of many statutory terms, and 

ascertaining whether or not they are ambiguous, entails consulting legislative history. See, e.g., 

Livingston, ‘‘Congress, the Courts, and the Code: Legislative History and the Interpretation of 

Tax Statutes’’, 69 Tex. L. Rev. 819, 832 (1991) (‘‘The tax legislative process differs in several 

important respects from the model assumed in most interpretative theories. These differences 

include * * * the reliance on an extraordinary volume of legislative history (committee reports, 

floor colloquies, and so on) to explain and supplement the statutory language.’’). 

24 In Grapevine Imps., Ltd. v. United States, 636 F.3d 1368 (Fed. Cir. 2011), a case decided 

after Mayo, the Court of Appeals for the Federal Circuit did not deem complete step one of a 

Chevron inquiry without considering legislative history. See id. at 1379 (‘‘Having concluded that 

the text, standing alone, does not resolve Congress’s intended treatment of basis overstatement, 

we next must look to see if there are any other indications of Congressional intent so clear that 

we perceive no room for an agency to add anything.’’ (Emphasis supplied.)). 

25 Brand X’s premise may very well be that ‘‘Article III courts * * * sit to render decisions 

that can be reversed or ignored by executive officers.’’ Natl. Cable & Telecomms. Association v. 

Brand X Internet Servs., supra at 1017 (Scalia, J., dissenting). We do not, however, presume 

that Brand X bestows upon us, a statutory court, the power to sit in judgment on decisions rendered by the highest constitutional court in ‘‘statutory-construction cases involving agency-administered statutes’’ and designate these decisions ‘‘agency-reversible’’, solely on the basis of an 

absence of dicta disclaiming the centrality of legislative history to the Court’s conclusions. Id.

at 1018–1019. 

Brand X requires only that the prior judicial construction 

‘‘follows from the unambiguous terms of the statute’’. Natl. 

Cable & Telecomms. Association v. Brand X Internet Servs., 

545 U.S. at 982. 23 It is entirely possible for a court’s opinion 

to discover, acknowledge and comment upon textual ambiguities in the statute and yet rest its construction on the 

remaining ‘‘unambiguous terms of the statute’’. Having done 

so, the court may very well analyze legislative history for 

additional evidence of congressional intent supporting its 

construction. 24

Whatever Mayo may or may not prescribe (or proscribe) 

with respect to legislative history at Chevron step one, surely 

that prescription (and proscription) comes too late for the 

‘‘many hundreds of past statutory decisions’’, Natl. Cable & 

Telecomms. Association v. Brand X Internet Servs., supra at 

1018 (Scalia, J., dissenting), that have in fact looked at legislative history, including Colony. 25

Chevron restrains ‘‘Judges, [who] are not experts in the 

field, and are not part of either political branch of the 

Government * * * [from reconciling] competing political 

interests * * * on the basis of * * * [their] personal policy 

preferences.’’ Chevron U.S.A. Inc. v. Natural Res. Def. 

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 393

26 Brand X would, in fact, ‘‘hold judicial interpretations contained in precedents to the same 

demanding Chevron step one standard that applies if the court is reviewing the agency’s construction on a blank slate’’, Natl. Cable & Telecomms. Association v. Brand X Internet Servs., 

545 U.S. at 982. Under that standard, ‘‘If a court, employing traditional tools of statutory construction, ascertains that Congress had an intention on the precise question at issue, that intention is the law and must be given effect.’’ Chevron U.S.A. Inc. v. Natural Res. Def. Council, 

supra at 843 n.9 (emphasis supplied). Traditions, even with respect to tools of statutory construction, evolve over time. Applying current, rather than then-prevalent mores, to define 

traditionality in tools of statutory construction for categorizing that construction’s Chevron status would seem anachronistic. More troubling, it could leave this Chevron categorization in flux, 

sliding up and down a two-step staircase, as the bag of permissible tools shrinks and expands. 

We, therefore, are reluctant to characterize legislative history, whose use may have fallen out 

of favor more recently, as nontraditional and, therefore, beyond the pale, for purposes of determining the Chevron classification of Colony, a case decided in 1958, when the Supreme Court 

readily resorted to legislative history in interpreting agency-administered statutes. See, e.g., 

Farber, ‘‘The Inevitability of Practical Reason: Statutes, Formalism, and the Rule of Law’’, 45 

Vand. L. Rev. 533, 536 (1992); Molot, ‘‘Reexamining Marbury in the Administrative State: A 

Structural and Institutional Defense of Judicial Power Over Statutory Interpretation’’, 96 Nw. 

U. L. Rev. 1239, 1297 (2002). 

Council, 467 U.S. at 865. On the other hand, Brand X’s concern is ‘‘ ‘the ossification of large portions of our statutory 

law,’ * * * [which would be caused] by precluding agencies 

from revising unwise judicial constructions of ambiguous 

statutes.’’ Natl. Cable & Telecomms. Association v. Brand X 

Internet Servs., supra at 983 (quoting United States v. Mead 

Corp., 533 U.S. 218, 247 (2001) (Scalia, J., dissenting)). 

Brand X’s principle for deciding whether or not ‘‘A court’s 

prior judicial construction of a statute trumps an agency 

construction otherwise entitled to Chevron deference * * * 

follows from Chevron itself.’’ Id. at 982. Thus, Brand X does 

not introduce any substantive constraints on judicial statutory construction independent of, and in addition to, 

Chevron’s warning to ‘‘federal judges—who have no constituency—* * * to respect legitimate policy choices made by 

those who do.’’ 467 U.S. at 866. It stands to reason, therefore, 

that only if an ‘‘unwise judicial construction’’ represents a 

policy choice, must it yield to ‘‘the wisdom of the agency’s 

policy’’. Id.

For ‘‘deossification’’ of judiciary’s historical ‘‘un-wisdom’’ to 

proceed, what would matter, then, are not the tools a court 

had employed in constructing the statute, 26 but the considerations it weighed during that process. Agencies should, thus, 

be free to revisit and reject a past judicial statutory construction but only if the construction arose from ‘‘assessing the 

wisdom of * * * policy choices and resolving the struggle 

between competing views of the public interest’’. Id.

394 136 UNITED STATES TAX COURT REPORTS (373) 

27We find validation for this classification in the recent opinions in Home Concrete & Supply, 

LLC v. United States, 634 F.3d 249 (4th Cir. 2011), and Burks v. United States, 633 F.3d 347 

(5th Cir. 2011), decided by the Courts of Appeals for the Fourth and Fifth Circuits, respectively, 

after Mayo. Each discusses the Mayo opinion and neither finds anything in it that would require 

a downgrade in Colony’s Chevron standing. See, e.g., Burks v. United States, supra at 360 (‘‘Because we hold that § 6501(e)(1)(A) is unambiguous and its meaning is controlled by the Supreme 

Court’s decision in Colony, we need not determine the level of deference owed to the Regulations.’’); id. n.9 (‘‘Although we hold that § 6501(e)(1)(A) is unambiguous and its meaning is controlled by the Supreme Court’s decision in Colony, we note that even if the statute was ambiguous and Colony was inapplicable, it is unclear whether the Regulations would be entitled to 

Chevron deference under Mayo’’.); Home Concrete & Supply, LLC v. United States, supra at 257 

(citing Mayo for the proposition that ‘‘Chevron deference is warranted only when a treasury regulation interprets an ambiguous statute’’ and concluding that ‘‘Because the regulation here interprets ‘omits from gross income’ under § 6501(e)(1)(A), and the Supreme Court declared that 

statute unambiguous, we do not believe that the regulation is entitled to controlling deference.’’); 

id. at 257 (Wilkinson, J., concurring) (‘‘I am persuaded that the Supreme Court rested its judgment in Colony on the plain language of the statute * * * [and] believe that Colony was decided 

under Chevron step one * * * [even though] there is some language in Colony suggesting that 

the Court looked at legislative history or thought that § 275(c) was ambiguous.’’). 

28 As discussed supra notes 11 and 17, the Court of Appeals for the Federal Circuit has in 

Grapevine Imps., Ltd. v. United States, 636 F.3d 1368 (Fed. Cir. 2011), characterized Colony as 

a Chevron step two holding, which permits contrary regulations entitled to deference. The Court 

of Appeals for the Seventh Circuit in Beard v. Commissioner, 633 F.3d at 623, also indicated 

in dicta that it ‘‘would have been inclined to grant the * * * regulation Chevron deference,’’ 

though it did not in fact reach that issue since it found Colony not to control the interpretation 

of sec. 6501(e)(1)(A), a conclusion foreclosed here by Bakersfield Energy Partners, LP v. CommisThe Supreme Court in Colony did allude to a policy concern when it mentioned that a contrary result would ‘‘create 

a patent incongruity in the tax law.’’ Colony, Inc. v. Commissioner, 357 U.S. at 36–37. However, this statement was 

offered merely to buttress the Court’s central conclusion that 

‘‘We think that in enacting § 275(c) Congress manifested no 

broader purpose’’ than the one the Court was attributing to 

it and that to attribute a different purpose ‘‘would be to read 

§ 275(c) more broadly than is justified by the evident reason 

for its enactment’’. Id. at 36 (emphasis supplied). We find 

these statements sufficient to conclude that Colony reveals 

unambiguous congressional intent rather than a policy choice 

the Court was making in the absence of agency guidance. 

Consequently, as we did in Intermountain, even after Mayo, 

we classify Colony as a Chevron step one holding. 27

We do not consider the Court of Appeals for the Ninth Circuit’s observation that the Supreme Court in Colony had 

‘‘acknowledged that the statutory language was ambiguous,’’ 

Bakersfield Energy Partners, LP v. Commissioner, 568 F.3d 

at 778, fatal to Colony’s Chevron step one status in that circuit. Even if we were to assume that the Court of Appeals 

for the Ninth Circuit would treat Colony as a Chevron step 

two holding, 28 respondent’s regulatory appeal to Brand X to 

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 395

sioner, 568 F.3d 767 (9th Cir. 2009). See supra note 16. 

Grapevine is therefore the only case thus far that both accepts Colony as controlling the interpretation of sec. 6501(e)(1)(A) and allows the Commissioner to reach a contrary result by regulation. ‘‘That the Supreme Court * * * [has] strongly reasoned for a certain interpretation of these 

statutes does not mean their inherent ambiguity has been wiped away.’’ Grapevine Imps., Ltd. 

v. United States, supra at 1379. The contrast with the Brand X ‘‘caveat’’ of Justice Stevens, who 

had authored Chevron for a unanimous Supreme Court, that ‘‘a decision by this Court * * * 

would presumably remove any pre-existing ambiguity’’, Natl. Cable & Telecomms. Association 

v. Brand X Internet Servs., supra at 1003 (Stevens, J., concurring), could not be starker. Regardless, we respectfully disagree with the Court of Appeals for the Federal Circuit, which declined 

to classify Colony as a Chevron step one holding because ‘‘The Court did not find that there 

was no other reasonable interpretation’’ of the statutory language contained in current sec. 

6501(e)(1)(A). Grapevine Imps., Ltd. v. United States, supra at 1379. For the reasons set forth 

supra notes 26 and 27 and the accompanying text, we believe Colony represents an explication 

of unambiguous congressional intent rather than a policy choice ‘‘resolving the competing interests which Congress itself either inadvertently did not resolve, or intentionally left to be resolved by the agency charged with the administration of the statute in light of everyday realities.’’ Chevron U.S.A. Inc. v. Natural Res. Def. Council, 467 U.S. at 865–866. We decline to characterize Colony’s ascertainment of congressional intent ambiguous merely because the Supreme 

Court did not explicitly note that ‘‘it has reached, not only the right (‘best’) result, but ‘the only 

permissible’ result’’, Natl. Cable & Telecomms. Association v. Brand X Internet Servs., 545 U.S. 

at 1018 (Scalia, J., dissenting), in an opinion handed down over a quarter of a century before 

Chevron was decided. 

29See also supra note 5 discussing respondent’s denial of the retroactive character of the regulations. 

supplant the Colony holding fails to meet the Chenery test. 

See SEC v. Chenery Corp., 332 U.S. at 196–197 (holding, 

with respect to ‘‘the basis upon which * * * [administrative 

action] purports to rest,’’ that ‘‘a court [cannot] be expected 

to chisel that which must be precise from what the agency 

has left vague and indecisive.’’). 

IV. Respondent’s Difficulty Does by His Own Indecision Grow

Respondent persists in drawing a sheathed sword to attack 

a statute of limitations defense to an alleged abusive Son-ofBOSS sheltering transaction. 29

Respondent may desire to repeal Colony in the name of 

Brand X. If so, he should decisively say as much. SEC v. 

Chenery Corp., supra at 196 (‘‘If the administrative action is 

to be tested by the basis upon which it purports to rest, that 

basis must be set forth with such clarity as to be understandable.’’). 

Respondent declares in the final regulations’ preamble that 

‘‘The interpretation adopted by the Supreme Court in Colony

represented that court’s interpretation of the phrase [‘omits 

from gross income’] but not the only permissible interpretation of it.’’ T.D. 9511, 2011–6 I.R.B. at 455. Appealing to 

Brand X and asserting his privilege ‘‘to adopt another 

396 136 UNITED STATES TAX COURT REPORTS (373) 

30 Chenery may demand less than crystal clarity of purpose, but at least when applied at 

Chevron step two it should require more than muddled thinking. Chevron deference appears incompatible with an agency asking a court to choose between two or more alternative validating 

grounds. See Interstate Commerce Commn. v. Bhd. of Locomotive Engrs., 482 U.S. 270, 283 

(1987) (holding that a court ‘‘may not affirm on a basis containing any element of discretion—

including discretion to find facts and interpret statutory ambiguities—that is not the basis the 

agency used, since that would remove the discretionary judgment from the agency to the court’’ 

(emphasis supplied)). The agency, having invoked its discretion to fill statutory gaps by issuing 

regulations, cannot then surrender it by seeking validation of the regulations on any one of a 

number of competing grounds. See Holland v. Natl. Mining Association, 309 F.3d 808, 818 (D.C. 

Cir. 2002) (refusing to choose among several potential validating grounds because ‘‘Chevron deference is only appropriate where the agency’s action represents its reasoned judgment about the 

meaning of the statute.’’). 

reasonable interpretation of ’’ that phrase, respondent equivocates in the next breath, by adding the proviso ‘‘particularly 

as * * * [that phrase] is used in a new statutory setting.’’ Id.

As discussed above, the Court of Appeals for the Ninth Circuit has rejected the proposition that section 6501(e)(1)(A) 

constitutes ‘‘a new statutory setting’’ for the phrase ‘‘omits 

from gross income’’. 

The appeal to Brand X in the final regulations’ preamble 

is further attenuated by a preceding statement that reiterates respondent’s position that Colony ‘‘dealt with an omission from gross income in the context of a trade or business 

under the predecessor of section 6501(e)’’ and no longer 

‘‘applies to sections 6501(e)(1) and 6229(c)(2)’’. Id.

‘‘It will not do for a court to be compelled to guess at the 

theory underlying the agency’s action’’. SEC v. Chenery 

Corp., supra at 196–197. Even if we read the Supreme 

Court’s recent Mayo opinion as a license to categorize most 

judicial constructions that discuss legislative history as 

Chevron step two decisions, respondent has yet to unabashedly accept the Court of Appeals for the Ninth Circuit’s 

invitation and issue regulations that unequivocally repudiate 

the Colony holding. Unless and until he does so, his hands 

must remain tied. 30 Consequently, his discretion in interpreting section 6501(e)(1)(A), howsoever noble and worthy of 

deference, must remain circumscribed. 

V. Conclusion

When enacting section 6501(e)(1)(A) in 1954, Congress 

could not possibly have foreseen the development of the tax 

shelter industry and the use of complex devices, such as Sonof-BOSS transactions, which seek to artificially inflate bases 

of partnership assets to achieve tax alchemy. Much as we 

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 397

may be tempted, we cannot speculate on how the Congress 

that enacted section 6501(e)(1)(A) would have meant it to 

apply in the present-day context. To paraphrase Justice 

Holmes, we do not inquire what the legislature would have 

meant. Cf. Holmes, ‘‘The Theory of Legal Interpretation’’, 12 

Harv. L. Rev. 417, 419 (1899), reprinted in Collected Legal 

Papers 207 (1920) (‘‘We do not inquire what the legislature 

meant; we ask only what the statute means.’’). In this case, 

we do not even ask what the statute means; we merely ask 

what the Court of Appeals for the Ninth Circuit and the 

Supreme Court have told us the statute means. 

The Court of Appeals for the Ninth Circuit tells us that 

Colony controls the meaning of the phrase ‘‘omits from gross 

income’’ as it now appears in section 6501(e)(1)(A). Bakersfield Energy Partners, LP v. Commissioner, 568 F.3d at 778. 

And the Supreme Court has told us, in Colony, that this 

phrase does not include an overstatement of basis. We thus 

hold that only a 3-year limitations period under section 

6501(a) applies here. Consequently, we hold the FPAA issued 

after the expiration of this 3-year period to be untimely. We 

further hold petitioner’s and the partners’ consents executed 

after the FPAA was issued to be invalid. We will therefore 

grant petitioner’s motion for summary judgment. The Court 

has considered all of respondent’s contentions, arguments, 

requests, and statements. To the extent not discussed herein, 

we conclude that they are meritless, moot, or irrelevant. 

To reflect the foregoing, 

An appropriate order and decision will be entered. 

Reviewed by the Court. 

COLVIN, GOEKE, and KROUPA, JJ., agree with this opinion. 

MARVEL, J., concurs in the result only. 

GUSTAFSON and MORRISON, JJ., did not participate in the 

consideration of this opinion. 

HALPERN and HOLMES, JJ., concurring: 

I. Introduction

We have joined Judge Thornton’s concurring opinion, 

which would grant petitioner’s motion for summary judgment 

398 136 UNITED STATES TAX COURT REPORTS (373) 

1 E.g., Intermountain Ins. Serv. of Vail, LLC v. Commissioner, 134 T.C. 211, 224 (2010) (invalidating the temporary regulations, secs. 301.6229(c)(2)–1T, 301.6501(e)–1T, Temporary Proced. & 

Admin. Regs., 74 Fed. Reg. 49322–49323 (Sept. 28, 2009), on the ground that Colony, Inc. v. 

Commissioner, 357 U.S. 28 (1958), is a Chevron U.S.A. Inc. v. Natural Res. Def. Council, 467 

U.S. 837 (1984) (Chevron), step one holding, which ‘‘ ‘forecloses the agency’s interpretation’ of 

sections 6229(c)(2) and 6501(e)(1)(A)’’). 

2 Judge Wherry’s report in this case was referred to the Court Conference by the Chief Judge 

pursuant to the authority of sec. 7460(b). It was reviewed by the Court Conference, and Judge 

Wherry’s disposition of petitioner’s motion for summary judgment prevailed because all of the 

Judges voting at the Court Conference either were for the report or concurred in the result. A 

majority of the voting Judges authoring or joining an opinion, however, agree with Judge Thornton that, to grant the motion, we should go no further than to reiterate our historical position 

that the statute unambiguously precludes respondent’s interpretation. 

3While we agree with Judge Thornton that there is no need to address the final regulations, 

it is because, as Judge Wherry notes, see majority op. note 3, ‘‘respondent can reasonably be 

expected to cite and rely on the final regulations * * * in any appeal’’ that we think it would 

be better to ask the parties their views on the validity of the final regulations before trying to 

hold them invalid. There are different standards for reviewing the procedural validity of temporary and permanent regulations, and there is some risk to both parties that we are making 

arguments neither would choose to make on his or its own. 

on the ground of this Court’s prior decisions consistently 

holding that our construction of section 6501(e)(1)(A) follows 

from the unambiguous terms of the statute. 1 That is a sufficient ground to dispose of this case and should end the 

matter. But the prevailing opinion 2 does not stop there. 

Without benefit of argument from the parties, Judge Wherry 

has addressed the final regulations, sections 301.6229(c)(2)–

1 and 301.6501(e)–1, Proced. & Admin. Regs. (the final regulations), and found one reason to question them and two reasons to reject them. 3 First, he suggests (‘‘assumptions not 

necessarily * * * [contradicted] here’’) that they are 

‘‘ ‘arbitrary, capricious, an abuse of discretion, or otherwise 

not in accordance with law’, * * * [or not] issued in ‘observance of procedure required by law’ ’’. Majority op. p. 388. 

Second, he classifies Colony, Inc. v. Commissioner, 357 U.S. 

28 (1958) (Colony), as a Chevron U.S.A. Inc. v. Natural Res. 

Def. Council, Inc., 467 U.S. 837 (1984) (Chevron), step one 

holding, which is contradicted by, and thus renders invalid, 

the final regulations (as we held in Intermountain Ins. Serv. 

of Vail, LLC v. Commissioner, 134 T.C. 211, 224 (2010) 

(Intermountain) with respect to the temporary regulations). 

See majority op. pp. 387, 391. Finally, assuming arguendo 

that Colony is a Chevron step two holding, he disqualifies the 

final regulations as violating the Chenery doctrine, SEC v. 

Chenery Corp., 332 U.S. 194 (1947) (Chenery). Majority op. 

pp. 394–395. 

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 399

4 Judge Wherry hints, majority op. note 23, that there might be different rules for resorting 

to legislative history in tax cases, citing with approval Prof. Livingston’s 20-year-old observation 

that ‘‘The tax legislative process differs in several important respects from the model assumed 

in most interpretive theories.’’ Livingston, ‘‘Congress, the Courts, and the Code: Legislative History and the Interpretation of Tax Statutes’’, 69 Tex. L. Rev. 819, 832 (1991). This may be true, 

but the Supreme Court unanimously warned us just earlier this year that ‘‘we are not inclined 

to carve out an approach to administrative review good for tax law only. To the contrary, we 

have expressly ‘[r]ecogniz[ed] the importance of maintaining a uniform approach to judicial review of administrative action.’ ’’ Mayo Found. v. United States, 562 U.S. ll, ll, 131 S. Ct. 

704, 713 (2011) (quoting Dickinson v. Zurko, 527 U.S. 150, 154 (1999)). 

We file this concurring opinion because of the prominence 

of the prevailing opinion. See Bushnell v. Commissioner, 49 

T.C. 296, 311 (1967) (Raum, J., concurring) (concurring 

opinion filed to rebut theory relied on in prevailing opinion). 

We address the second two of Judge Wherry’s three reasons, 

the first (unless one and the same with the Chenery reason) 

giving us nothing to grasp. 

II. Chevron Step One

Judge Wherry classifies Colony as a Chevron step one decision principally on the basis of our analysis in Intermountain. Majority op. p. 391. In Intermountain, 134 T.C. at 

223–224, we stated that, on the basis of its review of the 

legislative history of the predecessor to section 6501(e)(1)(A), 

the Supreme Court in Colony ‘‘concluded that Congress’ 

intent was clear and that the statutory provision was 

unambiguous.’’ The Supreme Court, we added, found in that 

section’s legislative history the narrow purpose of extending 

the 3-year period of limitations only when a taxpayer had 

omitted an item of gross income. Id. at 224. 4 We concluded: 

In so holding, the Supreme Court found that the statute’s legislative history clarified its otherwise ambiguous text and, as a result, explicated Congress’ intent and the meaning of the statutory provision. Thus, the 

Supreme Court’s opinion in Colony, Inc. v. Commissioner, supra, ‘‘unambiguously forecloses the agency’s interpretation’’ of sections 6229(c)(2) and 

6501(e)(1)(A) and displaces respondent’s temporary regulations. See Natl. 

Cable & Telecomms. Association v. Brand X Internet Servs., * * * [545 

U.S. 967, 983 (2005) (Brand X)]. Consequently, the temporary regulations 

are invalid and are not entitled to deferential treatment. [Id.; fn. refs. 

omitted.] 

While the majority in Intermountain dutifully cited Brand 

X, it paid insufficient attention to the Supreme Court’s specific instruction that ‘‘A court’s prior judicial construction 

* * * trumps an agency construction * * * only if the prior 

400 136 UNITED STATES TAX COURT REPORTS (373) 

5This point is made in Note, ‘‘Implementing Brand X: What Counts as a Step One Holding?’’, 

119 Harv. L. Rev. 1532, 1536 (2006). 

6 Id.

7Sec. 275(c), I.R.C. 1939. 

court decision holds that its construction follows from the 

unambiguous terms of the statute’’. Brand X, 545 U.S. at 982 

(emphasis added). Judge Wherry reads Brand X to allow a 

subsequent regulation to trump the holding of a case ‘‘only 

if an ‘unwise judicial construction’ represents a policy choice’’. 

Majority op. p. 393. This seems to be a unique reading of 

Brand X, which distinguishes between statutes that the 

courts have found ambiguous and those they have found 

unambiguous, see Brand X, 545 U.S. at 982, not between 

cases where judges self-consciously make policy choices and 

cases where they engage in the more pedestrian work of construing a statute’s terms. 

The appropriate focus of any application of Brand X is the 

prior opinion’s holding, specifically whether it held that its 

interpretation of a provision ‘‘[followed] from the unambiguous terms of the statute’’. 5 That, in turn, raises two questions: (1) what exactly did the earlier court assert? and (2) 

does its assertion carry authority? ‘‘The first inquiry seeks 

meaning and asks: did this court assert that its interpretation was the only reasonable one? The second seeks authority 

and asks: was this assertion part of the case’s holding?’’ 6

Both inquiries must yield positive answers in order for a 

court applying Brand X to find a step one holding. 

Colony is a pre-Chevron case, and the Supreme Court did 

not have to decide whether its interpretation of the statute 

was the only reasonable one (i.e., that the statute was 

unambiguous, or clear) or merely the best one. The first 

inquiry, seeking meaning, is, for that reason, problematic 

when applied to Colony. It is even more so for us, a national, 

trial-level Court, because the Supreme Court has not spoken 

clearly on the issue of legislative history in the Chevron

framework and the situation in the Courts of Appeals is 

muddled. See Intermountain, 134 T.C. at 232–236 (Halpern 

and Holmes, JJ., concurring in the result). Brand X signals 

an agency-deferential approach to statutory interpretation. 

Given the difficulties in trying to reclassify Colony within the 

Chevron framework, we too would be inclined to require 

either an explicit statement that the predecessor statute 7

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 401

8See supra note 5. 

9 An explicit-statement approach is suggested by the author in Case Comment, ‘‘Administrative Law—Chevron Deference—Federal Tax Court Holds Pre-Chevron Judicial Construction of 

Statute Precludes Subsequent Agency Interpretation if Prior Construction Was Premised on 

Legislative History.—Intermountain Insurance Service of Vail, LLC v. Commissioner, No. 25868–

06, 2010 WL 1838297 (T.C. May 6, 2010)’’, 124 Harv. L. Rev. 1066, 1071 (2011). 

10We recognize that the Courts of Appeals have addressed this issue and have reached varying results. Grapevine Imps., Ltd. v. United States, 636 F.3d 1368, 1378 (Fed. Cir. 2011) (ambiguous at Chevron step one); Beard v. Commissioner, 633 F.3d 616 (7th Cir. 2011) (inclined to 

give regulations Chevron deference), revg. T.C. Memo. 2009–184; Burks v. United States, 633 

F.3d 347, 360 (5th Cir. 2011) (unambiguous at Chevron step one; Home Concrete & Supply, LLC 

v. United States, 634 F.3d 249, 257 (4th Cir. 2011) (accord). 

was unambiguous or a holding dependent on such 

unambiguity, 8 before declining to give deference to the Secretary’s contrary regulations. 9 We do not find either in 

Colony and, thus, if called upon to do so, would not find it 

a Chevron step one holding. 10

III. Chenery

Supplementing our analysis in Intermountain, Judge 

Wherry addresses the contingency that we may have been 

wrong there in deciding that Colony is a Chevron step one 

holding. Even if it is not, he says, the Supreme Court’s decision in Chenery would still invalidate the final regulations. 

Majority op. pp. 394–395. In Bakersfield Energy Partners, LP 

v. Commissioner, 568 F.3d 767, 778 (9th Cir. 2009), affg. 128 

T.C. 207 (2007), the Court of Appeals for the Ninth Circuit 

implicitly brought into question Colony’s standing as a 

Chevron step one holding by suggesting that the Secretary 

may have authority to reinterpret the phrase ‘‘omits from 

gross income’’. Barring written stipulation to the contrary, 

this case is appealable to the Court of Appeals for the Ninth 

Circuit. See sec. 7482(b)(1)(E), (2). Understandably, Judge 

Wherry may wish to be heard on that question. Unfortunately, his contribution—his conclusion that Chenery

requires the Secretary to ‘‘unequivocally’’ repudiate Colony in 

his regulations, majority op. p. 396—will, if mistaken for the 

position of the Court, likely only cause us more trouble in our 

already nettlesome relationship with the Administrative 

Procedure Act (APA), 5 U.S.C. secs. 551–559, 701–706 (2006). 

The problem is that the APA itself requires no 

‘‘unequivocal’’ statement; it requires only ‘‘a concise general 

402 136 UNITED STATES TAX COURT REPORTS (373) 

11 Judge Wherry is right, of course, that ‘‘Chenery sweeps wider than the Administrative Procedure Act’s ‘basis and purpose’ requirement, * * * agency action can be upheld only on the 

ground previously advanced by the agency.’’ Majority op. note 6. But there cannot be any other 

grounds in this case—never having asked respondent his views on the matter, he cannot possibly advance justifications in favor of the regulations different from those in the preamble to 

the regulations. 

statement of * * * [the regulations’] basis and purpose.’’ Id.

sec. 553(c) (emphasis added). 11

The Secretary did explain his basis for the final regulations. He recognized authority for his substantive view of a 

broad, general definition of gross income. T.D. 9511, 2011–6 

I.R.B. 455, 456 (‘‘outside of the trade-or-business context 

* * * the section 61 definition of gross income applies’’). He 

referenced sections 7805 and 6230(k) as his authority for 

issuing the final regulations. Id. He disagreed with our 

holding in Intermountain that the Supreme Court’s 

interpretation of the statutory phrase in question (‘‘omits 

from gross income’’) in Colony was the only permissible 

interpretation, and, on the basis of that disagreement, he 

relied on Brand X as his authority for superseding that 

interpretation. Id., 2011–6 I.R.B. at 455. 

The Secretary also made his purposes clear: To supersede 

the, in his view, erroneous view of the Courts of Appeals for 

the Ninth and Federal Circuits that Colony is not limited to 

the trade or business context under the predecessor of section 6501(e)(1), id., and to address Intermountain’s holding 

that the Supreme Court’s interpretation in Colony is the only 

permissible interpretation of the statutory language (‘‘omits 

from gross income’’) in sections 6229(c)(2) and 6501(e)(1)(A), 

id.

While Judge Wherry recognizes the Secretary’s dual purposes of (1) limiting Colony to a trade or business circumstance and (2) failing that, establishing his authority 

under Brand X to supersede the Supreme Court’s interpretation of the phrase ‘‘omits from gross income’’, he finds neither 

adequate. Majority op. p. 381. The first, he believes, attempts 

to usurp the courts’ function of interpreting the Supreme 

Court’s opinions. We agree. See Bakersfield Energy Partners, 

LP v. Commissioner, supra. The second, he believes, is fatally 

equivocal, principally because of the preamble’s reference to 

‘‘a new statutory setting.’’ Majority op. p. 396. For him, that 

is an unacceptable ambiguity: does the Secretary really mean 

he can trump the Supreme Court’s interpretation in Colony

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 403

12More recently, in validating the final regulations, the Court of Appeals for the Federal Circuit found the Supreme Court’s opinion in Colony, Inc. v. Commissioner, 357 U.S. 28 (1958), to 

be ambiguous. Grapevine Imps., Ltd. v. United States, supra. 

or is he reiterating his view that Colony is confined to the 

1939 Code? Until the Secretary unequivocally takes the 

former position, Chenery, according to Judge Wherry, ties the 

Secretary’s hands. Majority op. p. 396. We do not agree. 

First, it must be kept in mind that the Secretary’s reference to a new statutory setting arises only in the context 

of his rebuttal of our holding in Intermountain that the 

Supreme Court’s opinion in Colony was the only permissible 

interpretation of the statute. Following the Secretary’s recital 

of the Supreme Court’s statement in Colony that the term 

‘‘omits from gross income’’ is ambiguous, which he states 

‘‘meaning * * * susceptible to more than one reasonable 

interpretation’’, he references Brand X and states that the 

Secretary and the IRS are permitted to adopt another reasonable interpretation of the term, ‘‘particularly as it is used in 

a new statutory setting.’’ T.D. 9511, 2011–6 I.R.B. at 455. 

The Secretary does not say, e.g., ‘‘because of ’’ or ‘‘in light of ’’ 

that new setting. It seems to us that he was merely 

addressing what he saw as a flaw in our Intermountain analysis; viz, that the meaning the Supreme Court attached to 

the phrase ‘‘omission from income’’ in the 1939 Code necessarily attached to the same phrase in the 1954 Code. 

Tellingly, after stating his disagreement with Intermountain, 

the Secretary drives home his right to challenge it by citation: ‘‘See Hernandez-Carrera v. Carlson, 547 F.3d 1237 (10th 

Cir. 2008) (agencies are free to promulgate a reasonable 

construction of an ambiguous statute that contradicts any 

court’s interpretation, even the Supreme Court’s).’’ Id., 2011–

6 C.B. at 455–456. Why cite language of the, at the time, 12

only Federal appellate-level decision applying Brand X to a 

Supreme Court interpretation other than to try to overturn 

a Supreme Court interpretation? 

Moreover, neither Chenery nor the APA requires crystal 

clarity of purpose. We think that it is reasonably clear from 

the preamble to the final regulations that the Secretary 

believes that, relying on Brand X, he can come to a different 

conclusion as to the meaning of section 6501 than the 

Supreme Court did in Colony. And despite Judge Wherry’s 

assertions to the contrary, Chenery asks no more. He is right 

404 136 UNITED STATES TAX COURT REPORTS (373) 

that under APA section 706(2)(A) the Secretary’s findings 

cannot be arbitrary and capricious, majority op. p. 388, and 

we recognize that under that standard ‘‘the agency must 

examine the relevant data and articulate a satisfactory explanation for its action’’, Motor Vehicle Manufacturers Association of the U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 

U.S. 29, 43 (1983) (emphasis added). And although a court 

cannot provide a reasoned basis for the Secretary’s decision 

if he did not, see id. (citing Chenery), a court must ‘‘uphold 

a decision of less than ideal clarity if the agency’s path may 

reasonably be discerned’’, id. (quotation marks omitted); see 

also Providence Yakima Med. Ctr. v. Sebelius, 611 F.3d 1181, 

1190 (9th Cir. 2010). The Secretary’s Brand X rationale 

meets that standard, and that is enough. See, e.g., Nw. Ecosystem Alliance v. U.S. Fish & Wildlife Serv., 475 F.3d 1136, 

1146 (9th Cir. 2007) (though not ‘‘a paragon of clarity * * *, 

the Service’s reasoning can be discerned with careful 

reading.’’); Dominion Res., Inc. v. United States, 97 Fed. Cl. 

239, 259 (Feb. 25, 2011) (the Secretary’s path could ‘‘be ‘discerned,’ albeit somewhat murkily’’). We have no call to 

require more than that, with reasonable effort, the Secretary’s intent can be discerned. See Vt. Yankee Nuclear 

Power Corp. v. Natural Res. Def. Council, Inc., 435 U.S. 519, 

543–544, 548 (1978) (absent extremely compelling circumstances, courts should not overturn agency decisions 

when the statutory minimums have been met). 

Finally, we recognize that, having accepted Judge Wherry’s 

criticism of the Secretary’s first rationale (limiting Colony) 

and rejected his criticism of the second (reliance on Brand X), 

we are left with a mixed basket of correct and incorrect 

rationales for an agency’s decision, which might provide sufficient reason for a court to invalidate the agency’s action. 

E.g., Intl. Union, UMW v. U.S. Dept. of Labor, 358 F.3d 40, 

44–45 (D.C. Cir. 2004). But ‘‘[w]hen an agency relies on multiple grounds for its decision, some of which are invalid, 

* * * [we] may nonetheless sustain the decision as long as 

one is valid and the agency would clearly have acted on that 

ground even if the other were unavailable.’’ Casino Airlines, 

Inc. v. NTSB, 439 F.3d 715, 717 (D.C. Cir. 2006) (internal 

quotation marks omitted); see also Fed. Express Corp. v. 

Mineta, 373 F.3d 112, 118 (D.C. Cir. 2004) (‘‘No principle of 

administrative law or common sense requires us to remand 

(373) CARPENTER FAMILY INVS., LLC v. COMMISSIONER 405

13 Judge Wherry disagrees, believing we cannot choose between alternative grounds. See majority op. note 30. In support of this view, he cites Holland v. Natl. Mining Association, 309 F.3d 

808 (D.C. Cir. 2002). But in Holland, the court was not weighing multiple rationales given by 

the agency. Instead, it remanded because it did not know whether the agency came to a decision 

on its own or left the reasoning to the Court of Appeals for the Eleventh Circuit, which had 

previously found against the agency. The court could not affirm if the basis for the decision was 

not the agency’s. See Interstate Commerce Commn. v. Bhd. of Locomotive Engrs., 482 U.S. 270, 

283 (1987). But in this case, the Secretary, rather than this or any other court, supplied the 

reasons. 

a case in quest of a perfect opinion unless there is reason to 

believe that the remand might lead to a different result.’’ 

(internal quotation marks omitted)). 13 Because we believe 

that the Secretary’s second rationale is independent of his 

first, we believe that he would stand behind his regulations 

on that ground alone. 

IV. Conclusion

We have made clear that we would not characterize Colony

as a Chevron step one holding. If called upon to do so, we 

would also find Chenery inapplicable. Nonetheless, since the 

temporary regulations are invalid per Intermountain, we 

have to concur with the Court’s disposition of petitioner’s 

motion for summary judgment. 

THORNTON, J., concurring: This Court’s prior decisions, 

beginning with Bakersfield Energy Partners, LP v. Commissioner, 128 T.C. 207 (2007), affd. 568 F.3d 767 (9th Cir. 

2009), have consistently held, relying on Colony, Inc. v. 

Commissioner, 357 U.S. 28 (1958), that its construction of 

section 6501(e)(1)(A) follows from the unambiguous terms of 

the statute. Moreover, our decision in Intermountain Ins. 

Serv. of Vail, LLC v. Commissioner, 134 T.C. 211 (2010), 

accords with decisions of the Courts of Appeals for the 

Fourth and Fifth Circuits rendered after Mayo Found. v. 

United States, 562 U.S. ll, 131 S. Ct. 704 (2011). See 

Burks v. United States, 633 F.3d 347 (5th Cir. 2011); Home 

Concrete & Supply, LLC v. United States, 634 F.3d 249 (4th 

Cir. 2011). The Courts of Appeals for the Federal and Seventh Circuits have rendered decisions to contrary effect. See 

Grapevine Imps., Ltd. v. United States, 636 F.3d 1368 (Fed. 

Cir. 2011); Beard v. Commissioner, 633 F.3d 616 (7th Cir. 

2011), revg. T.C. Memo. 2009–184. Nevertheless, there is no 

406 136 UNITED STATES TAX COURT REPORTS (373) 

compelling reason for this Court to abandon its precedents in 

this case, which is appealable to the Court of Appeals for the 

Ninth Circuit. That court has affirmed Bakersfield, although 

without addressing the final regulations, which had not then 

been issued. Presumably that Court of Appeals and perhaps 

the Supreme Court will have future occasion to do so. But at 

least for now the prevailing opinion appropriately holds in 

this case that the regulations do not trump this Court’s prior 

decisions. See Natl. Cable & Telecomms. Association v. Brand 

X Internet Servs., 545 U.S. 967, 984 (2005). 

COHEN, HALPERN, HOLMES, and PARIS, JJ., agree with this 

concurring opinion. 

f